Credit Score

07 Apr 2021

What is a Credit Score?

Your credit score is can be the key to financial freedom, or the shackles that hold you down. What goes into creating this magic number? Why should you care what your score is? What can I do with a good score?

If you were to lend your best friend $100, how likely are they to pay you back? Did you cringe or were you confident that your friend would repay you? Congrats, you just gave your friend a credit score! Instead of using your opinion to assign their reliability, you would probably want to depend on knowing their entire history of paying their debts to everyone when $100 is on the line. Well, you are in luck! Two main companies keep track of this for you. Fico and VantageScore which we will get into the differences between the two a little later. Both of these entities will assign you a number based on a few different factors that summarize how dependable you are to potential lenders.

If your friend was very likely to pay you back, would you want to reward them to pay you back? Credit card companies and banks will do the same for you in the form of lower interest rates and more perks when you have a high score! On the other hand, if your score is on the low end, you will end up paying high-interest rates with no perks. If your score is really low, it will be hard to find someone who will lend you money at all.

Why should I have a good credit score?

You probably perked up at the hint of credit card perks. These can come in the form of 0% interest for few months, cash and airline miles rewards for every dollar you spend, or quality of life bonuses for travel. If that does not get you excited to see your score grow, maybe the thought of owning some real estate as a first home or investment property is more your speed. A better score will entice banks to lend you a larger amount of money and/or a lower interest rate for that loan. Increasing your score by one or two hundred points could save you tens of thousands of dollars over the life of a loan. If this is an investment property, this means more monthly income in your pocket every month . Are you still looking for a reason and have not found one yet? Okay, sounds like you might be looking to start a business and plow your own path. A solid credit score can make you more appealing to investors to get your amazing startup idea off the ground.

What is a good score?

You might be screaming at ClinkUp by now, SHOW ME THE SCORES! What is a 400, what is an 850? Well in the most anti-climactic fashion, the answer: it depends. Remember those two companies mentioned earlier? They have different opinions on what should go into a credit score and with that have their pros and cons for each. Fico has two different forms, base and industry-specific. Fico's industry-specific scores are geared towards auto and mortgage loans range starting at 250 and maxing out at 900. Fico also offers a base score that lines up closely with VantageScore's current version (4.0). These both have a range from 300-950.

Again a bunch of numbers but what should you aim for? You want to aim for a minimum of 670 to be seen as a "dependable borrower". At this level, many doors begin to open. You will qualify for most credit cards you can apply to. You begin to qualify for refinancing loans with better interest rates than you might have collected when your score was lower. A goal you should always have in mind is to improve your score.

After all of this information, you are ready to find your score. The most commonly used website to find your score is Credit Karma. Another benefit to most credit cards is that many offer a free monthly fico credit report every month.

    How do I improve my credit score?

    Your credit score might seem mysterious but it simply a number that allows potential lenders to quickly get an estimate of how likely you are to repay them if they lend your money. Based on this idea, there are a few actions you can take to improve your score.

    Payment History is the most important attribute that will affect your credit score. This is simply the number of payments missed to lenders. Missing just one payment can negatively affect your credit score! Credit history, or the length of time you have been borrowing money, is the next most important factor. A longer history provides a better picture of your dependability over the long term. The third most important attribute of your credit score is your credit usage ratio. Credit usage is the total amount owed divided by the total amount available to be borrowed. At 11% of your score, the total dollar amount owed is taken into account. Have you had any credit checks within the last 6-12 months? Those hard credit checks contribute to 5% of your score. Finally, your available credit line amount makes up the last 3% of your score. This is calculated by total credit available minus amount that you currently owe.

    Paying down your credit card balance to zero every month will help show that you can manage a line of credit without letting it get out of control. This will also help you avoid interest payments! Your car, mortgage, and student loans are also factored into your credit score. Maintaining consistent payments on these accounts is a great way to increase your score. Paying above the minimum payment will save you money on interest by applying more toward the principal but will also contribute to a better credit usage ratio.

    Credit score attributes:

    • payment history- 40%
    • credit history - 21%
    • credit usage - 20%
    • total balances - 11%
    • credit check - 5%
    • available credit - 3%